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Credit Suisse, Inflation, and the latest on SVB · Bloomberg Intelligence

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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller. Every business day we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com Slash podcast. Again, a lot of
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Speaker 1: weight to this tape all throughout the day. One of
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Speaker 1: the reasons is some concern about the banking sector, and
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Speaker 1: the news today was our good friends over in Zurich,
0:32
Speaker 1: Credit Swiss, the story that just keeps giving and not
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Speaker 1: in a good way. So we want to get the
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Speaker 1: latest on what's happening at Credit Swiss. How concerned should
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Speaker 1: we be about the European banking sector in general, and
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Speaker 1: what is the spill of our effect, if any, for
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Speaker 1: some of the larger US global banks. To do that,
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Speaker 1: we welcome Alison Williams. She's a senior banks analyst for
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Speaker 1: Bloomberg Intelligence. She is also a leader of the Bloomberg
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Speaker 1: Intelligence business in the US, So we appreciate getting some
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Speaker 1: time here, Alison. You know, give us the latest on
1:02
Speaker 1: Credit Swiss. I guess the latest news is their big
1:06
Speaker 1: Arab Investor Inc. Coming back for more? Is that kind
1:09
Speaker 1: of the story? So I think, you know, the issue
1:13
Speaker 1: with credit tweets that I think has in common with
1:16
Speaker 1: the SF The situation is just it's it's sort of
1:21
Speaker 1: a market sentiment and it's hard to make fundamental arguments
1:26
Speaker 1: against market sentiment, especially when we saw in four q
1:30
Speaker 1: that investors got so concerned they pulled over one hundred
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Speaker 1: billion from the bank and you know, they said on
1:37
Speaker 1: Monday they've seen inflows. Um. You know that provided sort
1:41
Speaker 1: of a moment of confidence. But I think what's difficult
1:44
Speaker 1: now is investors are trying to get a sense of, um,
1:48
Speaker 1: you know what can turn this around. Because we had
1:52
Speaker 1: their their newest biggest shareholder saying that that that they're
1:56
Speaker 1: not going to increase their positions, partly because of regulatory
2:00
Speaker 1: statutory reasons, but then they cited also other reasons, which um,
2:05
Speaker 1: they were vague about. And you know that they have
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Speaker 1: another long time shareholder, um having sold off their position
2:13
Speaker 1: in the past couple of quarters. So it does seem
2:17
Speaker 1: like we need to hear from thisis regulators. Um, there's
2:21
Speaker 1: a story that just uh that came out a little
2:24
Speaker 1: bit ago. UM. Again, I have no idea the validia
2:28
Speaker 1: of the story. But saying that, UM, they are asking
2:31
Speaker 1: for a public show of report from the regulators, Alison,
2:34
Speaker 1: what does their balance sheet look like? So that the
2:38
Speaker 1: the their balance sheet is very different from uh, you
2:43
Speaker 1: know the two banks that we saw UM fail in
2:46
Speaker 1: the US in the sense that they do not have
2:51
Speaker 1: the issue of you know, this this huge bond portfolio
2:55
Speaker 1: with unrealized losses. UM. You know that that was sort
2:58
Speaker 1: of a thing that was out there that when deposits
3:01
Speaker 1: outflow from those banks, UM, you know, they couldn't UM.
3:06
Speaker 1: You know, that really caused illiquidity and those issues. So UM,
3:11
Speaker 1: you know, for credit suites, they do have a fair
3:14
Speaker 1: amount of deposits, they do have some wholesale funding, they
3:17
Speaker 1: just raised capital, They have a fourteen point one percent
3:20
Speaker 1: CET one ratio, They had tons of excess liquidity at
3:25
Speaker 1: least at the end of the fourth quarter. You know
3:27
Speaker 1: that The concern is just that you know, that can
3:30
Speaker 1: shift very quickly UM. And so I think that's why
3:33
Speaker 1: investors are looking for, UM, you know, some sign of
3:37
Speaker 1: stability or some disclosure to provide some comfort. Unfortunately, when
3:42
Speaker 1: when when people reference their CET one ratio as I
3:45
Speaker 1: just did, or banks come out and say they don't
3:47
Speaker 1: need to raise capital. There's obviously a little bit of
3:50
Speaker 1: skepticism because of things that we saw in the past.
3:53
Speaker 1: But but I will I will chime into you know,
3:55
Speaker 1: Paul saying earlier that this feels very different than two
3:59
Speaker 1: thousand and eight. And I think, you know, one key
4:01
Speaker 1: difference is in two thousand and eight, we did have
4:05
Speaker 1: a lot of you know, we had broad issues in
4:08
Speaker 1: the system, broad issues, and in this case, we have
4:13
Speaker 1: some mismanagement at a few banks that some names that
4:16
Speaker 1: people are worried about. The deposit the deposit mismatch and
4:22
Speaker 1: the and the bond investments are brought across the US banks,
4:25
Speaker 1: but but certainly not to the you know, the couple
4:29
Speaker 1: of banks had had very unique um their their deposit
4:35
Speaker 1: bases were very weak, if you will, and so that
4:37
Speaker 1: that was what was sort of unique about them. And
4:39
Speaker 1: some are with credit sweets, and I think that's what
4:41
Speaker 1: we saw with credit speees over the last couple of years,
4:44
Speaker 1: is that a lot of their business has gone away
4:47
Speaker 1: to some of the stronger repetitors. That's that's what's led
4:49
Speaker 1: to the pressure. And and I'll just say, I'll just
4:51
Speaker 1: say one thing that I know Paul remembers. But you know,
4:54
Speaker 1: when Lehman failed, there was a significant period of time
4:58
Speaker 1: between bear Stearns and Lehman, and I think where banks
5:02
Speaker 1: were reducing risk, managing their counterparty risk, and so you know,
5:05
Speaker 1: when we had that moment with Lehman, it was a
5:08
Speaker 1: big money market fund. It was something that people didn't anticipate.
5:13
Speaker 1: But again with Credit Suis, this is not an overnight
5:16
Speaker 1: situation like it was with Silicon Valley bank shares. This
5:21
Speaker 1: is something that's been happening over a couple of years.
5:24
Speaker 1: They don't have the prime broberge business anymore, and so
5:26
Speaker 1: I think there's a lot of the systemic risk that
5:30
Speaker 1: we would normally worry about have been reduced. So, Alice,
5:32
Speaker 1: that's kind of where I wanted to go. I think
5:34
Speaker 1: one of the things I learned as a newbie to
5:36
Speaker 1: the kind of the bank, you know, the bank and
5:38
Speaker 1: bank accounting and how it all works is void confidence
5:42
Speaker 1: is so key, and when you lose the confidence of
5:44
Speaker 1: your counterparties, basically it's game over. And that's kind of
5:48
Speaker 1: what we saw for during two thousand and eight for
5:50
Speaker 1: a number of players. Does Credit Swiss have that risks
5:54
Speaker 1: today credit suis. It is a crisis of confidence happening
5:59
Speaker 1: right out and they do need and I think that
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Speaker 1: is why they're asking regulators to come out and show
6:04
Speaker 1: some kind of support. There needs to be there needs
6:07
Speaker 1: to be something that provides a floor under the market
6:10
Speaker 1: and gives some kind of confidence. Um. And again, you know,
6:14
Speaker 1: over the last year or so, they did have a
6:16
Speaker 1: one big shareholder that was sticking by them, Um, they
6:20
Speaker 1: raised a capital Those were both kind of signs that
6:22
Speaker 1: things were studying. They said that flows had sort of studied.
6:26
Speaker 1: And then you know there's now some questions around those
6:29
Speaker 1: disclosures and how accurate they were, and so that that
6:33
Speaker 1: makes it tough for the bank to come out and
6:35
Speaker 1: make comments. And I think that's why they do need
6:36
Speaker 1: a third party to um, you know, come in and
6:40
Speaker 1: stab wise things and give some confidence. That's that's what
6:44
Speaker 1: the FED did when with the banks, right, so they
6:46
Speaker 1: not only did they take over the banks, they said
6:49
Speaker 1: that the deposits are going to be insured, and they
6:52
Speaker 1: provided a facility to you know, cut the worries across
6:56
Speaker 1: a broader banking system and so UM, I think that's
7:00
Speaker 1: that's sort of what we need at this moment from
7:02
Speaker 1: from the good place. Could somebody buy them take over
7:04
Speaker 1: what's happening on that front of anything, So that you know,
7:09
Speaker 1: and I think we've talked about before. You know, people
7:12
Speaker 1: have long speculated about m and A with kret suite.
7:14
Speaker 1: See in the past, didn't think that was a possibility
7:17
Speaker 1: because they are are globally systemic important bank with a
7:21
Speaker 1: very complex balance sheet um and you know, there's all
7:25
Speaker 1: the regulatory aspects, especially if you're considering cross border. However,
7:29
Speaker 1: if you look at their operations today, having sold off
7:32
Speaker 1: a lot of their trading, they're not in prime brokerage,
7:35
Speaker 1: they're cutting a lot of risk assets. They're really going
7:37
Speaker 1: to a more focused wealth manager. It does seem like
7:40
Speaker 1: that that could be more of a possibility. There's you know,
7:43
Speaker 1: there's still a systemically important bank based on you know,
7:48
Speaker 1: some of the historical metrics, but you know, the way
7:50
Speaker 1: that the business looks going forward, is there an opportunity?
7:54
Speaker 1: You know that. But then the other side of that
7:57
Speaker 1: is UBS has been gaining massive flows while kred Swiss
8:02
Speaker 1: has been having outflows, and neither one is going to
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Speaker 1: point to or confirm or deny what's happening on the
8:09
Speaker 1: competitive front, but it seems pretty clear. But the flows
8:12
Speaker 1: are going to UBS anyway, So that the question is,
8:15
Speaker 1: you know, is someone going to step in and buy
8:18
Speaker 1: buy this bank or will they just try to continue
8:21
Speaker 1: to win share in other ways Swiss National Bank, Allison,
8:27
Speaker 1: are you surprised that the Swiss National Swiss National Bank
8:30
Speaker 1: hasn't either made a forceful statement of support or maybe
8:35
Speaker 1: even done something more like take some actions amount But
8:37
Speaker 1: you know, I don't know what that action would be.
8:39
Speaker 1: But are you surprised we haven't seen that yet from them?
8:42
Speaker 1: I think that, you know, we in the US find
8:44
Speaker 1: it surprising. I think because it is a very different
8:49
Speaker 1: regulator right than the FED. And I think that, um,
8:52
Speaker 1: you know, from everything that we know and hear about it,
8:55
Speaker 1: they just tend to operate a little bit differently, um
9:00
Speaker 1: Whereas I think the FED is much more known for
9:04
Speaker 1: coming out and having a voice in the market and
9:06
Speaker 1: addressing things on so um. And there is a difference between,
9:11
Speaker 1: you know, if you look at sort of the universe,
9:14
Speaker 1: UM that that they're overseeing the issue with the credit
9:18
Speaker 1: suite and UBS. I think versus some of the US
9:20
Speaker 1: banks is that if you look at historically their assets
9:24
Speaker 1: and their businesses as a multiple of the SPIS economy,
9:27
Speaker 1: they're much more important to the Spis economy just these
9:31
Speaker 1: two banks. Um, so one would one would think that
9:36
Speaker 1: something would be coming again, since no one really knows
9:40
Speaker 1: what that might be, and you know, we we don't
9:43
Speaker 1: know what's going on between behind the scenes and the
9:45
Speaker 1: conversations and um, you know, if there's if if they're
9:50
Speaker 1: you know, what the conversations are between them and the
9:53
Speaker 1: credit suite and anything else. Yeah, because when I think Switzerland,
9:57
Speaker 1: I think cheese. I think I mean, yeah, yeah, chocolate
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Speaker 1: and banking. So I don't know where the Swiss National
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Speaker 1: Bank is, all right, Alison, thanks so much for joining us.
10:05
Speaker 1: Alison Williams, Senior Global Banks analyst at Bloomberg Intelligence. Just
10:09
Speaker 1: trying to get the latest on this credit Swiss thing.
10:11
Speaker 1: I mean, I used to work there. Man. When I
10:13
Speaker 1: was there, we were killing it, you know. But the
10:16
Speaker 1: institution before my time and since has always always had
10:21
Speaker 1: just a real blind spot for controls, you know, and
10:27
Speaker 1: bad things happen more so more frequently there than in
10:30
Speaker 1: other places. It seems. We want to break down how
10:34
Speaker 1: can those retail sales numbers looked? And how the consumers
10:37
Speaker 1: looking and how just retailers in general are looking. And
10:40
Speaker 1: when you want to do that, there's only one place
10:43
Speaker 1: to go, and that's Dana Telsea, chief Research Officer and
10:45
Speaker 1: CEO of Telsey Advisory Group. Dana, let's start with those
10:49
Speaker 1: retail sales numbers this morning. What were your takeaways I
10:54
Speaker 1: think overall? And first of all, thank you for having me.
10:57
Speaker 1: I think the takeaways overall for retail sales been mind
11:00
Speaker 1: you had January revised upward, and most of the retailers
11:03
Speaker 1: I'm talking about talking to talked about the surprise and
11:07
Speaker 1: the strength in January as frankly, goods and markdown cleared
11:11
Speaker 1: out the beginning of February. I mean, definitely a little
11:14
Speaker 1: bit wishywashy, so not totally surprised. February is not a
11:18
Speaker 1: very significant month. You had a lot of strengths in
11:21
Speaker 1: department stores in the month of January, part of that
11:24
Speaker 1: coming from the increase in social Security payments that the
11:28
Speaker 1: baby boomers were seeing to like the shop at some
11:31
Speaker 1: of the department stores. And my takeaway is that we
11:34
Speaker 1: are seeing consumers slowed down in goods. We had been
11:38
Speaker 1: seeing it. We're going to continue to see it inventory
11:41
Speaker 1: levels have gotten clean, and the uncertainty in the environment
11:45
Speaker 1: feeds through to overall consumer spending. Dana, when we talk
11:49
Speaker 1: about what twenty twenty three was supposed to kind of hail.
11:51
Speaker 1: I think it was still a couple of months of
11:54
Speaker 1: markdowns and clearances, and we weren't quite done with that era.
11:58
Speaker 1: Now that we perhaps are looking at the macroeconomic environment
12:01
Speaker 1: where easing is on the table, is that still the case.
12:07
Speaker 1: I think overall we're still going to see a challenge
12:09
Speaker 1: first u first quarter, and second quarter maybe like that too.
12:13
Speaker 1: I think overall, whether it's the level of traffic, whether
12:17
Speaker 1: it's product returns, even the normalization of increases that luxury
12:21
Speaker 1: goods is occurring right now. So overall, the guidance for
12:26
Speaker 1: particularly the first quarter is coming in below consensus. But
12:30
Speaker 1: you know what, I think whatever that consensus was, I
12:34
Speaker 1: think the whisper expectations out there was for it to
12:37
Speaker 1: be lower. If you can manage your expenses, keep your
12:41
Speaker 1: inventories levels lean in order to take advantage of whenever
12:46
Speaker 1: the consumer feels a little bit more certain that some
12:49
Speaker 1: leverage to the bottom line is the focus, and we're
12:51
Speaker 1: definitely seeing it. Cosmetics is one of the areas that
12:55
Speaker 1: that's working. It seems like there's a pickup and experiential
12:58
Speaker 1: with restaurants. The apparel part is a bit more challenge. Now, Dana,
13:03
Speaker 1: what are you the companies telling you about China reopening
13:08
Speaker 1: reopening faster than people thought. I believe the US is
13:10
Speaker 1: going to loosen pretty significantly the visa restrictions, the vaccine
13:14
Speaker 1: restrictions for Chinese travelers. On the luxury side, that's going
13:19
Speaker 1: to be a big, big plus. It is. And how
13:23
Speaker 1: did you know that? We just came out with a
13:25
Speaker 1: report on Monday all about the China reopening and who
13:29
Speaker 1: particularly benefits. So your timing, frankly, couldn't be more perfect,
13:36
Speaker 1: because you're exactly right. It does benefit luxury And if
13:39
Speaker 1: you think of what we've been seeing now, we've been
13:41
Speaker 1: seeing certainly some improvement levels, whether it was companies like
13:45
Speaker 1: Tapestry or LVMH. Who's talking about the rebound and the
13:49
Speaker 1: reopening of China? That who we're hearing about it. Who
13:53
Speaker 1: benefits It's LVMH given the diversification their portfolio, It's Urmez,
13:58
Speaker 1: It's Richmond given the penetration and luxury goods that they
14:02
Speaker 1: have right now. So I'm excited about how China reopens
14:05
Speaker 1: to the world, But there's two other elements just to
14:08
Speaker 1: note about this China reopening. Let's talk about what the
14:11
Speaker 1: travels look like. In twenty nineteen, China had over one
14:15
Speaker 1: hundred and fifty million outbound travelers who spent two hundred
14:19
Speaker 1: and fifty five billion dollars to two nineteen. The savings
14:23
Speaker 1: of Chinese consumers rose two point six trillion dollars in
14:27
Speaker 1: twenty twenty two. So exactly like you said, if they
14:31
Speaker 1: begin to travel, even in the second half of the year,
14:34
Speaker 1: they will be a big benefit to retail sales. Tina.
14:38
Speaker 1: When we're talking about the China story, I feel like
14:40
Speaker 1: we also have talked about other regions of the world
14:42
Speaker 1: to what extent. Is the Middle East becoming a more
14:45
Speaker 1: and more important region for some of those luxury names.
14:51
Speaker 1: So when you think about the Middle East overall, it
14:53
Speaker 1: is becoming more important. But when you think about where
14:57
Speaker 1: sales are coming from, where there's companies like LVMH just
15:01
Speaker 1: that smallest part of the world, the Middle East and
15:04
Speaker 1: some other areas, it's still only seven percent of sales,
15:08
Speaker 1: so it's certainly not as significant when you look at
15:11
Speaker 1: the carryings of the world to who owned Gucci, it's
15:14
Speaker 1: still a relatively small piece of the pious seven percent. Also,
15:18
Speaker 1: there's a ways to go. Europe, Asia, North America are
15:24
Speaker 1: the areas where is the most beneficial impact. So we
15:28
Speaker 1: touched on luxury. How about on the other end of
15:30
Speaker 1: the retail spectrum. I'm thinking like the you know, the
15:32
Speaker 1: dollar stores and Dollar General and maybe maybe even you
15:36
Speaker 1: know Walmart and Targe. If I'm an investor, do I
15:39
Speaker 1: feel like, if times get tough, if there's a recession,
15:43
Speaker 1: if inflation persists, are we seeing people trading down to
15:47
Speaker 1: those types of stores. It's interesting many of the companies
15:53
Speaker 1: overall have not said that they've fully seen the trade
15:56
Speaker 1: down yet. But yet when you talk to the off pricers,
16:00
Speaker 1: the tjxes of the world, whose recent camps were up
16:03
Speaker 1: seven percent and we talked about an uptick in apparel
16:06
Speaker 1: and the pickup in traffic, Well they're getting they're getting
16:10
Speaker 1: that share. I think, like Walmart, Target is definitely planning
16:13
Speaker 1: cautiously for twenty twenty three. You'll look at their camp
16:17
Speaker 1: guidance of download single digits to upload single digits. Yet
16:22
Speaker 1: the margin recovery given Target expects operating income to grow
16:27
Speaker 1: double digits in twenty twenty three. That's encouraging. So yes,
16:31
Speaker 1: I do think you see the benefits of the trade
16:33
Speaker 1: down that way, and you see it in merchandise with
16:36
Speaker 1: the newness. You'll look at beauty ALTA, you have ALTA
16:40
Speaker 1: and target that should be a benefit. You look at loyalty,
16:43
Speaker 1: You look at that target circle. Loyalty member base of
16:45
Speaker 1: one hundred million plus today. There's opportunities for improvement and
16:50
Speaker 1: continued improvement in conversion at discounters. Dana thirty seconds here
16:56
Speaker 1: talks us a little bit about card spend. Are people
16:58
Speaker 1: still willing to spend on their credit cards or are
17:01
Speaker 1: we kind of looking at people buying from their savings
17:07
Speaker 1: a little bit buying from their savings at the lowered
17:09
Speaker 1: to middle income level. Credit card data has become a
17:12
Speaker 1: little bit more cautious lightly, and we're seeing a little
17:15
Speaker 1: bit of an uptick in some of those dead dats.
17:19
Speaker 1: All right, Danny, thank you so much for joining us.
17:20
Speaker 1: We really appreciate getting your perspective on all things retail.
17:25
Speaker 1: Danta Telsey, chief Research Officer and CEO of Telsey Advisory Group.
17:29
Speaker 1: Before that, she was a senior managing director at bear
17:31
Speaker 1: Stearns and chief was a former analyst at a firm
17:34
Speaker 1: called c J. Lawrence. And if you're of a certain generation,
17:38
Speaker 1: you know c J. Lawrence. You want to get right
17:43
Speaker 1: over to those regional banks and get back to see
17:45
Speaker 1: what has really been a big, big issue for this
17:47
Speaker 1: market over the last week or so with some of
17:50
Speaker 1: these failures of some of these small regional banks. Herman Chan,
17:53
Speaker 1: senior analyst US Regional Banks with Bloomberg Intelligence, joins a program. Also,
17:57
Speaker 1: we have Arnold Kakuta. He is credit analysts and we're
18:00
Speaker 1: intelligence focusing on the banks. Arnold, want to start with
18:04
Speaker 1: you because we were just talking to Katie Greifeld and
18:06
Speaker 1: she was talking with the source Anastasia Amarosso over at
18:09
Speaker 1: I Capital, and Anastasia was saying, hey, you gotta take
18:12
Speaker 1: a look at some of these bank bonds. There's some
18:14
Speaker 1: real quality out there and they're trading it very effective
18:17
Speaker 1: or very attractive yields it there. What are you seeing
18:21
Speaker 1: on the credit side of some of the regional banks
18:23
Speaker 1: out there, Arnold, Yeah, I mean definitely yeah. If if
18:27
Speaker 1: the storm passes and then you know, we got another
18:30
Speaker 1: curveball today with creditsis you know, having some issues and
18:33
Speaker 1: kind of bringing some you know, counterparty risk issues, you know,
18:36
Speaker 1: to to the bigger banks here. But uh, yeah, I
18:39
Speaker 1: think it's still not over though, right, Um you had,
18:41
Speaker 1: um what is it? I think Moody's h SMP coming
18:44
Speaker 1: in with a downgrade to um FRC you know, uh
18:48
Speaker 1: doubt from AAA minus to junk rating. Right, So, um,
18:52
Speaker 1: you know there's still definitely concerns on the deposit flow
18:55
Speaker 1: out risks, UM, the deposit out outflow risk and uh yeah,
19:00
Speaker 1: you know we might get an update, you know, one
19:02
Speaker 1: of these guys report quarterly earnings and saying, you know,
19:04
Speaker 1: do they have to tap this new you know, bank
19:07
Speaker 1: funding facility and whatnot. So I think, you know, there's
19:09
Speaker 1: still some risk out there, but you know, if you
19:12
Speaker 1: believe that things may stabilize and some of the bigger
19:14
Speaker 1: players may benefit. I you know, we got the news
19:18
Speaker 1: that b of A got fifteen billion of depolsits. You
19:20
Speaker 1: know probably you know, if that's the case, then JP
19:23
Speaker 1: Morgan probably got a lot more right, But there's still
19:26
Speaker 1: things out there that might be kind of a little
19:27
Speaker 1: bit dicey. Herman hop on into this conversation because in
19:31
Speaker 1: addition to all of this kind of craziness happening in
19:34
Speaker 1: the bond market, and of course some of these bank
19:35
Speaker 1: bonds spread. First Republic, one of the regional banks we
19:39
Speaker 1: were following getting downgraded today. Why there's a lot of
19:44
Speaker 1: asserts a new with their positive base. Management had an
19:48
Speaker 1: opportunity to discuss that when they've been on media reports
19:54
Speaker 1: and have been a bit avoiding the matter. So until
19:59
Speaker 1: we some more clarity on where deposits stand, there's going
20:03
Speaker 1: to be some uncertainty with the name. I do think
20:07
Speaker 1: that the liquidity facility that arnoldists articulated does shield them
20:12
Speaker 1: from some issues in terms of managing the balance sheets.
20:16
Speaker 1: But longer term is what happens with deposits and when
20:20
Speaker 1: can they stabilize and move on? So that's the underlying
20:25
Speaker 1: big question that the industry is trying to figure out
20:29
Speaker 1: right now. So Herman, I'm looking at the SP five
20:33
Speaker 1: hundred regional index here, stock index down thirty two percent
20:37
Speaker 1: year to date, down forty eight percent on a trailing
20:40
Speaker 1: twelve month basis. That's telling me that the market thinks
20:44
Speaker 1: this is more than just a blip. There's something fundamental
20:47
Speaker 1: out there. I know yesterday you did not think it
20:51
Speaker 1: was systemic per se. Right, has anything changed in twenty
20:54
Speaker 1: four hours. There's just a lot of them start to
20:57
Speaker 1: need in the marketplace, things tend to appear without notice.
21:04
Speaker 1: You've Arnold mentioned the court squee situation. That doesn't help confidence,
21:09
Speaker 1: and the there's a lot of uncertainty with where deposits
21:15
Speaker 1: are going, what happens with bank balance sheets, and where
21:20
Speaker 1: interest rates are going, and the economic repercussions of the
21:25
Speaker 1: bank fallouts, because if banks aren't going to lend because
21:29
Speaker 1: the posits are flowing out of the system, that has
21:31
Speaker 1: very strong implications for the future growth of the economy
21:35
Speaker 1: because banks are are scared at this point, so there
21:39
Speaker 1: will be some you know, domino effect of what's going on.
21:43
Speaker 1: So that's that's something that that is adding to the uncertainty.
21:46
Speaker 1: Well Herman, in addition to just some of the uncertaty
21:49
Speaker 1: that you're seeing. I thought it was interesting that Ken
21:51
Speaker 1: Griffin of Citadel bought a steak Western Alliance Bank coort
21:55
Speaker 1: w AL. The stock is down then, even though it
21:58
Speaker 1: was higher, I want to say, by like eight or
22:00
Speaker 1: nine percent in the pre market. Why that specific bank,
22:04
Speaker 1: Why are they not facing the same scrutiny or same
22:08
Speaker 1: downgrades as First Republic Yeah, I think Western Alliance is
22:12
Speaker 1: a bank that has historically been pretty well managed, low
22:16
Speaker 1: credit risk. It operates in the California, Arizona, Nevada market,
22:21
Speaker 1: so it's sort of tangential to what SPB does. They
22:25
Speaker 1: did buy a bank that does very much the same
22:29
Speaker 1: focus ass would be with startups in venture capital. So
22:32
Speaker 1: that's why they were initially lumped in. But the manager
22:35
Speaker 1: team has been very strong and they've they've come out
22:38
Speaker 1: with pretty good updates in terms of where they stand
22:43
Speaker 1: from a liquidity standpoint. So i'd point to that, Hey, Arnold,
22:47
Speaker 1: as a credit analyst, Um, what are you really looking
22:50
Speaker 1: at when you analyze a bank security? There? I mean,
22:56
Speaker 1: is it give us a sense of what you're looking
22:58
Speaker 1: at and how is it kind of look today? Yeah,
23:02
Speaker 1: So you know, traditionally we look at, you know, the
23:05
Speaker 1: loan book, how safe are the loans and you know, um,
23:09
Speaker 1: in terms of from that standpoint, right, the traditional bank
23:12
Speaker 1: credit analysis, UM, credit quality is still pretty resilient, you know,
23:17
Speaker 1: given what has been so far resilient consumer and so
23:20
Speaker 1: you know, people are paying their bills on time, um,
23:24
Speaker 1: and so but you know, slowly and steadily we've seen
23:27
Speaker 1: kind of a normalization the normalization of credit to you
23:31
Speaker 1: know where net net chargeoffs are rising, but but normalizing
23:34
Speaker 1: not you know, um, going you know anywhere haywire. But again,
23:38
Speaker 1: we're still at the start of a potential recession, right,
23:41
Speaker 1: and so I think things will get worse, But it's
23:45
Speaker 1: just a matter of you know, how much worse. And
23:47
Speaker 1: it's just a lot of this stuff that has happened. Now.
23:50
Speaker 1: This is it's almost like basic liquidity analysis, right where um,
23:55
Speaker 1: all right, you take in deposits and and and you
23:58
Speaker 1: make loans. But for a lot of these banks that
23:59
Speaker 1: kind of trouble, it's okay. They became bond managers, right,
24:03
Speaker 1: they had big bond portfolios that you know that they
24:06
Speaker 1: and then and then the regulation was more relaxed for
24:09
Speaker 1: them so that um, they didn't have to you know,
24:12
Speaker 1: really the unrealized losses on these available for sales securities.
24:16
Speaker 1: It did not hit their capital levels, so um, you know,
24:19
Speaker 1: it delayed the pain, right Like when the deposits fled
24:21
Speaker 1: and they had to sell these ass securities, that's when
24:25
Speaker 1: it really hurt. You know, that's when their capital levels
24:28
Speaker 1: will be hit. And so I think that's where the
24:30
Speaker 1: regulation might start changing, right, Uh, where where some of
24:33
Speaker 1: these mids of smaller size banks, UH might need to
24:37
Speaker 1: start accounting for, you know, how their bond portfolios are
24:40
Speaker 1: doing instead of you know, really realizing at the last
24:43
Speaker 1: moment when deposits are flinging out the door. Arnold. When
24:47
Speaker 1: we talk about spreads specifically, I think we're looking a
24:50
Speaker 1: lot at of course US and their bonds. I think
24:53
Speaker 1: it was like a one thousand basis point move or
24:56
Speaker 1: something something in like distress territory. Correct me if I'm
24:58
Speaker 1: wrong there, But I want to ask how long will
25:00
Speaker 1: it take for that to spread to some of the
25:03
Speaker 1: other banks. We're already seeing in a little bit in
25:05
Speaker 1: the equity price action, but in terms of the bond market,
25:08
Speaker 1: are they a little bit more insulated? Yeah, I mean
25:10
Speaker 1: we're starting to see you know, spreads. I think um bottom,
25:14
Speaker 1: like you know, from from a wideen in October and November,
25:17
Speaker 1: you know, kind of bottomed, uh tightened a lot until
25:20
Speaker 1: you know, early suburbins. We've been kind of on this
25:22
Speaker 1: widening path and you know, more wider today. But yeah,
25:25
Speaker 1: it's it's because of kind of the interconnectedness of these
25:29
Speaker 1: big banks, right, So that's you know, anytime one of
25:31
Speaker 1: these bigger institutions is having an issue. Yeah, you know
25:35
Speaker 1: credit Swist is a is a major trading accounting party
25:37
Speaker 1: to you know, the the JP Morgans and the Baas
25:40
Speaker 1: and stuff. So, um, I think there's definitely worry. And
25:43
Speaker 1: you know the banking model, right, it's it's it's you know,
25:46
Speaker 1: it's it's a big surprise because usually you can kind
25:49
Speaker 1: of see these things when companies are having issues. But
25:52
Speaker 1: with SBB, which um had about four billion of bonds
25:56
Speaker 1: and three three four billion of preferreds, this all happen
25:59
Speaker 1: and like in forty eight hours, right, and this is
26:02
Speaker 1: the definitely great names. So that's the fear. It's like, wow,
26:05
Speaker 1: this stuff can happen really quickly. Um. You know this
26:09
Speaker 1: competence game where if if you know, people start seeing
26:12
Speaker 1: the stocks move, oh my god, are they going to
26:14
Speaker 1: start moving their money whether it be you know, wealth
26:16
Speaker 1: management assets or deposits and and that that you know,
26:19
Speaker 1: when when when the funding goes away, you know, do
26:22
Speaker 1: you have enough liquid assets to you know, handle that outflow?
26:25
Speaker 1: And you know if if the deposit runner just so great,
26:28
Speaker 1: you know, any institution yea is almost at risk. All right, Arnold,
26:31
Speaker 1: I really appreciate getting your perspective. Arnold Ccuta, senior financials
26:35
Speaker 1: credit analysts with Bloomberg Intelligence, joining us on the phone
26:37
Speaker 1: in Herman Chan senior analysts for the regional banks, covering
26:40
Speaker 1: it from the equity side, both of them from Bloomberg Intelligence.
26:44
Speaker 1: He joins us here in our studio getting the latest
26:47
Speaker 1: on this regional bank challenge slash crisis. We get a
26:55
Speaker 1: sense of what all this turmoil in the world means
26:58
Speaker 1: for emerging markets and other parts of the world. Let's
27:02
Speaker 1: check in with Nick stot Miller. He is head of
27:04
Speaker 1: Global product for Medley Advisors. He joins us live in
27:06
Speaker 1: our Bloomberg and an active broker studio. So Nick, we've
27:09
Speaker 1: got Credit Swiss news today. We've had a couple of
27:12
Speaker 1: bank failures, granted, smaller banks in the US, a lot
27:18
Speaker 1: of uncertainty. We just had some bank anilys in here
27:20
Speaker 1: talking about all the uncertainty in the financial sector. How
27:23
Speaker 1: does it spill over to your world, to emerging markets
27:25
Speaker 1: and things like that. Well, Credit Swiss is obviously quite
27:30
Speaker 1: a large bank and quite active globally. But the banks
27:32
Speaker 1: that failed in the US, there's not really any direct connection,
27:35
Speaker 1: but I think the indirect connection, which is as you
27:38
Speaker 1: have increased in certainty in the financial sector in the US,
27:41
Speaker 1: banks becomes less willing to lend, and so that tightens
27:44
Speaker 1: global credit conditions and it makes a lot harder for
27:47
Speaker 1: these emerging markets to raise funding. So the tighter credit
27:52
Speaker 1: conditions will spill over into em and crimp growth. And
27:55
Speaker 1: then also you have the broader risk off move and
27:58
Speaker 1: you were talking about the strengthen the dollar, and you
28:00
Speaker 1: have a lot of the higher beats at EM currencies
28:02
Speaker 1: just getting whacked today on the move. Well, I love
28:05
Speaker 1: that you mentioned kind of the dollar going into this
28:08
Speaker 1: because your background is actually in the Middle East a
28:10
Speaker 1: little bit, and it's fascinating to me because a lot
28:12
Speaker 1: of these European banks that are getting hit have extra
28:15
Speaker 1: exposure to the Middle East that I would argue a
28:18
Speaker 1: lot of day the Silicon Valley banks or the regional
28:20
Speaker 1: banks that created the chaos earlier in the week, don't
28:23
Speaker 1: so walk us through kind of the connection there. Well,
28:27
Speaker 1: particularly in the Gulf, which is where I spent quite
28:29
Speaker 1: a bit of time, there's plenty of liquidity in terms
28:32
Speaker 1: of the sovereign wealth funds. In fact, you know the
28:34
Speaker 1: thing that really got kretty sweet moving today was the
28:38
Speaker 1: Saudi banking executive saying that they're not willing to put
28:41
Speaker 1: more money into it. So I don't think that this
28:44
Speaker 1: is blowing back on the Gulf. But if you remember
28:46
Speaker 1: back to the two thousand and eight crisis, it was
28:49
Speaker 1: Katar and some of the other Gulf sovereign wealth funds
28:52
Speaker 1: that provided backstops to some of the global banks. So,
28:55
Speaker 1: if anything, I would look for the Gulf to be
28:57
Speaker 1: a stabilizing force rather than experiencing instability as a result
29:01
Speaker 1: of this. It's amazing, I mean, and they're from your experience,
29:04
Speaker 1: they're still willing to invest in Western financial institutions. It's
29:09
Speaker 1: just this is a credit Swiss maybe specific issue. Yeah,
29:12
Speaker 1: and also the sovereign wealth funds don't want to be
29:15
Speaker 1: the first ones to pile in. You know. It's you know,
29:18
Speaker 1: as they say, it's sort of like catching a falling
29:20
Speaker 1: knife and you're trying to invest in these markets. So
29:22
Speaker 1: I would expect them to wait for the dust to
29:24
Speaker 1: settle a bit and then try to pick the strongest
29:26
Speaker 1: institutions that they think have, you know, the best prospects.
29:30
Speaker 1: Where where are you seeing opportunities these days? Because I'll
29:32
Speaker 1: tell you a lot of people are just very nervous
29:36
Speaker 1: across the board. We see that in the moves in
29:37
Speaker 1: the treasury market every day, just whipsawing all around. Where
29:40
Speaker 1: are you guys spending some time these days? Well, I
29:44
Speaker 1: think you know, there are a lot of decent fundamentals
29:46
Speaker 1: out there, particularly in Asia. And it's interesting that you know,
29:49
Speaker 1: the Korean one has actually benefited from a lot of
29:52
Speaker 1: this turmoil, even though you know their economy. A lot
29:56
Speaker 1: of these export dependent economies are probably going to have
29:58
Speaker 1: a bit of a slump and the second off of
30:00
Speaker 1: the year, assuming that there is a hard landing in
30:02
Speaker 1: the US. But you know, there seems to be some
30:05
Speaker 1: more fundamental strength there and much less financial instability. I
30:09
Speaker 1: think the key here is really just to wait until
30:11
Speaker 1: the dust settles on this, and if you do start
30:13
Speaker 1: to get some serious easing from the global central banks,
30:16
Speaker 1: there probably would be a rally down the road, but
30:18
Speaker 1: probably stay on the sidelines for now. I'd say, what
30:21
Speaker 1: does it then mean for say a country like in
30:25
Speaker 1: Latin America, for example, It has a lot of commodity exposure.
30:28
Speaker 1: And the reason I ask this is because if you're
30:29
Speaker 1: looking at the moves in oil for right now, or
30:32
Speaker 1: looking at a sixty seven handle on NIMEX crude, and
30:35
Speaker 1: it feels like ordinarily you wouldn't necessarily see oil react
30:38
Speaker 1: to something like the credit suite move, but it almost
30:41
Speaker 1: feels like it's a ripple effect of FED pricing. How
30:45
Speaker 1: does a em investor focus on Latin America or commodity
30:48
Speaker 1: exposed economies navigate that. Yeah, it's really tough, and I
30:53
Speaker 1: think you're one hundred percent right that a lot of
30:55
Speaker 1: the moves we're seeing commodities right now are more about
30:58
Speaker 1: financial ripples more so than necessarily the macro ripples. Because,
31:03
Speaker 1: of course, if the US goes into a deep recession
31:06
Speaker 1: as a result of all of this, of course that's
31:08
Speaker 1: going to pair demand for all of these commodities. But
31:10
Speaker 1: in the first instance, you know, a lot of these
31:12
Speaker 1: investment banks and trading desks are just really derisking, which
31:16
Speaker 1: means they need to dump a lot of the You know,
31:19
Speaker 1: I was just that because you know, having used to
31:22
Speaker 1: be on a trading desk, you know, I used to
31:24
Speaker 1: it's solemn brothers. I'd walk onto the government you know,
31:26
Speaker 1: to the fixed income bond trading floor. It maybe row
31:29
Speaker 1: after row after row of people trading government bonds. That's
31:33
Speaker 1: liquidity to me, that's not there is what I'm hearing,
31:36
Speaker 1: you know, really since Great Financial Crisis, that's really been
31:39
Speaker 1: winnowed down, and that can be a problem in certain times.
31:42
Speaker 1: And I'm hearing from a lot of people like you
31:44
Speaker 1: that that liquidity is an issue or lack of liquidity
31:46
Speaker 1: is an issue, absolutely, And when the markets are more volatile,
31:50
Speaker 1: market makers just aren't as aggressive and providing type pricing
31:54
Speaker 1: or that the size that people want, so that exacerbates
31:57
Speaker 1: the move. So volatility almost begets volatility In that case,
32:01
Speaker 1: what do you expect the FED to do next Thursday? Here,
32:04
Speaker 1: I'm looking at our world interest rate probability function warp warp,
32:08
Speaker 1: and it's showing that we've we're at or near peak
32:11
Speaker 1: rate and the rate check can start going down. I mean,
32:15
Speaker 1: is that way you think our our view is for
32:18
Speaker 1: another twenty five basis point hike coming up in March,
32:21
Speaker 1: and then another twenty five in May and then they're done. Okay,
32:25
Speaker 1: But that of course is caveat said on this not
32:27
Speaker 1: getting worse. If the banking system issues get worse, then
32:31
Speaker 1: the Fed's probably going to have to do something. And
32:34
Speaker 1: to the point about FED cuts being priced in the
32:36
Speaker 1: second half of the year. If that's what in fact happens,
32:39
Speaker 1: that things get so bad that the FED has to
32:41
Speaker 1: cut from June onwards, I think risk assets are going
32:45
Speaker 1: to be in a very different place. It's very hard
32:48
Speaker 1: for me to reconcile credit and equity markets, which have
32:51
Speaker 1: sold off but are still relatively resilient to these massive
32:54
Speaker 1: moves we've seen on the front end and just a
32:56
Speaker 1: complete repricing of the FED, and one of them has
32:59
Speaker 1: to be wrong. I don't think they can both be right.
33:01
Speaker 1: Are you going to start to see more than as
33:03
Speaker 1: we kind of see all this chaos shakeout, see more
33:05
Speaker 1: divergences in the sovereign bond world too. Paul's point, I
33:09
Speaker 1: mean it feels like German boons and treasuries on the
33:11
Speaker 1: same page at the moment, arguably guilt as well. But
33:14
Speaker 1: then you have something like Argentine debt or something. I
33:17
Speaker 1: think I read a story yesterday one hundred percent inflation
33:19
Speaker 1: there a lot of the em bond world. Are they
33:22
Speaker 1: going to be on the same page? No? And I
33:25
Speaker 1: think you saw this particularly in local currency debt and
33:27
Speaker 1: sort of the first day or two of this big
33:30
Speaker 1: sell off in risk assets that a lot of these
33:33
Speaker 1: local currency bonds were actually rallying because they said, oh, okay, well,
33:37
Speaker 1: if the FED is going to be less aggressive, that's
33:39
Speaker 1: lower global rates, which is good for all these bonds.
33:42
Speaker 1: But then the secondary effect is, you know, how much
33:45
Speaker 1: risk appetite are you going to have from global investors
33:47
Speaker 1: to be in this stuff? And you know, if the
33:49
Speaker 1: currencies are selling off and the economies are are weakening,
33:54
Speaker 1: it's not a good environment for emerging market bonds. So
33:57
Speaker 1: I think you will see this divergence. Traditional safe haven
34:01
Speaker 1: the biggest global developed markets will actually rally, but I
34:05
Speaker 1: think em is going to be in for some weakness
34:07
Speaker 1: over the next several months. We can't let an emerging
34:09
Speaker 1: markets manager walk out of our studient without talking about China.
34:13
Speaker 1: We were talking to Dana Telsley earlier. She's the top
34:17
Speaker 1: retail analyst on Wall Street, and she just came out
34:20
Speaker 1: with a big report Monday, really extolling the opportunities for retail,
34:24
Speaker 1: but particularly for luxury from the reopening of China, you know,
34:27
Speaker 1: in terms of the spending opportunities and so on and
34:30
Speaker 1: so forth. From an investment standpoint, where are we today
34:33
Speaker 1: with investing in China is that it people feel like
34:36
Speaker 1: it's a toxic a little bit, or can you still invest? Well,
34:41
Speaker 1: we've definitely seen over the last six months or so
34:45
Speaker 1: a lot of increased worry about US China trade relations
34:49
Speaker 1: and how that might spill into the wisdom of investing
34:55
Speaker 1: in Chinese assets. But from a fundamental standpoint, our China
34:59
Speaker 1: analyst is it is quite bullish on China. He thinks
35:01
Speaker 1: that growth will come in close to six percent, well
35:04
Speaker 1: above China's official around five percent forecast, and very much
35:09
Speaker 1: led by pent up demand from consumers, particularly on the
35:12
Speaker 1: services side. So we're actually quite bullish on China at
35:16
Speaker 1: this point. But with the caveat that the geopolitical risk
35:19
Speaker 1: is quite a bit higher than it has been in
35:21
Speaker 1: previous years. Yeah, because there you think about their pent
35:23
Speaker 1: up demand and they've been lockdown so much longer and
35:26
Speaker 1: harder than everybody else in the world. For travel, for spending,
35:29
Speaker 1: it's just going to be huge. And I walk to
35:31
Speaker 1: Penn Station occasionally and I walked through Time Squared and
35:33
Speaker 1: the European tourists are back in droves. They're back, but
35:38
Speaker 1: not so much Asia. That's kind of my just you
35:40
Speaker 1: primary research walking through Times Square, But man, that changes,
35:45
Speaker 1: that's just going to be so important to see how
35:47
Speaker 1: that place out across the economy. Nick stop Miller, thank
35:50
Speaker 1: you so much for joining us. Nick is the head
35:52
Speaker 1: of Global product for Medley Advisers. We appreciate him coming
35:56
Speaker 1: into our Bloomberg Interactive Broker Studio. It's always better to
35:58
Speaker 1: get these folks in persons him a gold star, don't
36:00
Speaker 1: we We give him a gold star, gold star from
36:02
Speaker 1: that whatever, all that kind of good stuff. We've been
36:07
Speaker 1: talking about this SVB Silicon Valley Bank, trying to cover
36:10
Speaker 1: it from every angles. One of the angles is there's
36:13
Speaker 1: a lot of companies that did business with sv being
36:16
Speaker 1: really dependent upon it, and what does that mean from them?
36:19
Speaker 1: And you know, you know, it's just it's really going
36:22
Speaker 1: to be an issue that I'll have a rippling effect
36:23
Speaker 1: through the valley for quite some time. And we want
36:25
Speaker 1: to get a unique angle here from the perspective of
36:28
Speaker 1: mergers and acquisition. Thomas Smail joins us. He's the CEO
36:31
Speaker 1: of FE International. Thomas nws much for joining us here
36:35
Speaker 1: in our Bloomberg Interactive Broker Studio. Give us just fifteen
36:39
Speaker 1: seconds elevator pitch. What do you guys do at FI International? Yeah,
36:43
Speaker 1: we're a m and a firm. We work with sellers
36:46
Speaker 1: of businesses in the tech space and we're up to
36:48
Speaker 1: two hundred and fifty million, and we help them ultimately
36:51
Speaker 1: exit that business to a range of acquires public companies,
36:55
Speaker 1: private equity firms, individuals, and strategic All right, so you're
36:58
Speaker 1: tied into the valley big time your clients or I
37:01
Speaker 1: mean the lifeblood. Here we are several days after the
37:06
Speaker 1: Silicon Valley kind of blow up here, What does it
37:09
Speaker 1: mean day to day for your clients that are out
37:12
Speaker 1: there in the valley in terms of I don't know,
37:14
Speaker 1: making payroll, you know, making investments in their business, paying
37:17
Speaker 1: you know, maybe thinking about strategic acquisitions that maybe they're
37:20
Speaker 1: talking to you about what's going on out there. Yeah.
37:23
Speaker 1: So interestingly, no real change. We had our team in
37:27
Speaker 1: the office all weekend cooling buyers, cooling sellers getting a
37:31
Speaker 1: field for their current appetite. No one we spoke to
37:34
Speaker 1: it change their strategy. Buyers are still buying, Sellers are
37:37
Speaker 1: still selling. Of the buyers we spoke to, less than
37:41
Speaker 1: one percent of them had exposure to SVB as as clients.
37:45
Speaker 1: So from what we've seen, it's going to be business
37:47
Speaker 1: as usual, particularly since the News on Monday, it seems
37:50
Speaker 1: like most things are beginning to pick up again. So
37:52
Speaker 1: I mean, is that simply in the context of the
37:54
Speaker 1: government is going to backstop SVB because it's I guess
37:58
Speaker 1: my understanding was the big tech players. Once you get
38:00
Speaker 1: to a certain size, yeah, alcrow SVB and you take
38:02
Speaker 1: your banking to the JPMorgan Chase or whatever. So it's
38:05
Speaker 1: really for smaller and mid sized tech companies that really
38:10
Speaker 1: rely upon SVB. So even those companies you're saying, they're
38:14
Speaker 1: not too concerned. Yeah, I mean, I think obviously there
38:16
Speaker 1: was a lot of noise about SVB, but the reality
38:19
Speaker 1: is it wasn't a large percentage of even tech companies
38:22
Speaker 1: banking with them. So there's definitely an effect, But the
38:25
Speaker 1: vast majority of people, once you get to a certain stage,
38:27
Speaker 1: you have multiple bank accounts, if you have a big
38:31
Speaker 1: enough business, you can easily move that relationship, which I
38:34
Speaker 1: know many people did. Like most companies like ass we
38:36
Speaker 1: have three banking relationships. So that doesn't really change. So, yes,
38:41
Speaker 1: you're right, FVB definitely tech focused. Definitely a lot of noise,
38:45
Speaker 1: but it doesn't really change things for the majority in
38:48
Speaker 1: the venture community out there. What's the feeling there, like
38:51
Speaker 1: if I have a really cool idea and I found
38:53
Speaker 1: myself on Sandhill Road, will I get my funding today? Yeah?
38:59
Speaker 1: I mean I think there's no real changed from that perspective.
39:01
Speaker 1: I'm not aware of anyone pulling term sheets at the
39:03
Speaker 1: moment or changing their deals. Like, ultimately, if you bank
39:06
Speaker 1: of SVB at the moment, you have access to your cash.
39:09
Speaker 1: A lot of the venture capital firms would be working
39:12
Speaker 1: with them. But I'm not aware of any changes from
39:15
Speaker 1: that perspective. The thing with the value as well, or
39:17
Speaker 1: just tech in general, word spreads fast. You don't want
39:20
Speaker 1: to get a reputation as a privateacity firm or a
39:23
Speaker 1: VC that's pulling term sheets from founders who are trying
39:26
Speaker 1: to make payroll. That's not good look. And people will
39:29
Speaker 1: talk how about rising interest rates? What does that mean
39:31
Speaker 1: for I mean, obviously for the publicly traded stocks, it
39:35
Speaker 1: was bad for them. In twenty twenty two, tech stocks
39:37
Speaker 1: underperformed dramatically. A lot of folks think texts may not
39:41
Speaker 1: even be a leader once we do get to the
39:43
Speaker 1: other side of this, as it's led the market for
39:45
Speaker 1: the last decade. You know, in terms of pop trading
39:49
Speaker 1: public stocks, what does it mean rising interest rates for
39:51
Speaker 1: your world out there for kind of mid sized tech
39:54
Speaker 1: m and A yeah. I think firstly, it's a great
39:57
Speaker 1: time to be a business owner in the tech space
39:59
Speaker 1: if you have a business below two hundred and fifty
40:01
Speaker 1: million invaluation. The majority of the business owners we work
40:05
Speaker 1: with the international have profitable businesses. They focus on generating
40:09
Speaker 1: positive cash flows. They don't necessarily rely on external investors.
40:14
Speaker 1: So interest rates definitely saying you keep an eye on
40:16
Speaker 1: as a small business owner, but if you're profitable ultimately,
40:20
Speaker 1: it doesn't really affect you. If anything, you're benefited from
40:23
Speaker 1: your bigger, bigger competitors being hindered maybe they have to
40:27
Speaker 1: make layoffs. If you're small and profitable, you're more nimble,
40:31
Speaker 1: you don't have a problem like that. So I think
40:33
Speaker 1: the world we operate in it's a good thing for
40:35
Speaker 1: most people. If you look at my ten fifty year
40:38
Speaker 1: view of tech, very bullish. How about the We have
40:43
Speaker 1: seen a lot of announcements from big tech companies, you know,
40:49
Speaker 1: publicly traded Microsofts of the world that Metas of the
40:51
Speaker 1: world laying off people. Meta just came out yesterday just
40:55
Speaker 1: above ten percent of their workforce. They're going to be
40:57
Speaker 1: like that, this is getting serious out there? What's the mood?
41:01
Speaker 1: And usually, like even six months ago, when we saw
41:03
Speaker 1: some of those tech laoffs, the assumption was that they
41:05
Speaker 1: were going to be hired tomorrow by somebody else. What's
41:08
Speaker 1: the mood out in the valley about this is getting
41:10
Speaker 1: serious in terms of layoffs. Yeah, So I think again
41:14
Speaker 1: there's a big difference between the big public companies and
41:17
Speaker 1: the small, nimble, profitable companies. If you're small and profitable.
41:22
Speaker 1: Of all the clients we've worked with, almost none of
41:24
Speaker 1: them are making layoffs at the moment because they don't
41:26
Speaker 1: need to. I think the larger firms, which are more
41:29
Speaker 1: affected by swings in their own stock price or just
41:32
Speaker 1: the public markets macro and like, they're definitely companies that
41:38
Speaker 1: have to be seen to be making layoffs to get
41:40
Speaker 1: closer to cash flow profitability. If you're a smaller business,
41:45
Speaker 1: less of a problem, you don't need to make layoffs,
41:47
Speaker 1: and that ultimately helps a lot of these small businesses
41:50
Speaker 1: compete and ultimately means that from an M and A perspective,
41:52
Speaker 1: there's consistent demand for those businesses because they're still making money.
41:56
Speaker 1: So what's a typical client or typical deal for Effie International?
42:00
Speaker 1: Is it like my company had a really cool idea,
42:02
Speaker 1: I built it, I had a couple of rounds of
42:04
Speaker 1: VC funding, I've grown it and now I'm looking for
42:07
Speaker 1: an exit. And is it to a I mean to do?
42:12
Speaker 1: I want to sell out to a private equity funder.
42:14
Speaker 1: I want to sell out to a strategic what's it
42:16
Speaker 1: a typical deal? Look for you? Yeah? So first thing,
42:18
Speaker 1: we've closed over twelve hundred transactions. But maybe I'll give
42:21
Speaker 1: you an example. We worked with recently a company called
42:24
Speaker 1: Thrive Car. It was in that education technology space. The
42:28
Speaker 1: founders started the business with nothing. He did not come
42:31
Speaker 1: from a rich background. He did not have a family
42:34
Speaker 1: with money, he had no investors. Started that business from
42:37
Speaker 1: zero about five years ago. Has been in contact with
42:41
Speaker 1: us for many years. We spoke to him two years ago.
42:44
Speaker 1: His business was a low seven figure valuation. A couple
42:48
Speaker 1: of months ago we helped him successfully exit for thirty
42:52
Speaker 1: five million. So there's a And what type of buyer
42:56
Speaker 1: was it? Was it a strategic buyer? Yeah? The buyer
42:58
Speaker 1: was a private equity firm called LTV Fund. They invest
43:02
Speaker 1: in tech companies generally below two hundred and fifty million
43:06
Speaker 1: invaluation if you mean, if you look at privacity as
43:09
Speaker 1: a whole. Currently there's three trillion dollars in dry powder.
43:13
Speaker 1: So you can look at the public markets and say
43:15
Speaker 1: maybe M and A isn't going to happen, But the
43:17
Speaker 1: reality is privacuity firms need to be deploying their capital.
43:20
Speaker 1: Deals like Thrive Car profitable growing are always going to
43:24
Speaker 1: be popular. There's a lot of privacty firms out there.
43:27
Speaker 1: They want to deploy their capital and that strategy isn't
43:29
Speaker 1: really going to change interesting all right, So things so
43:32
Speaker 1: maybe not quite as bad out in the Valley as
43:35
Speaker 1: we're some afearing of given on the backs of the
43:38
Speaker 1: SVB failure. Thomas Smail, thanks so much for joining us year.
43:42
Speaker 1: Thomas Smail. He's the CEO of FI International, providing M
43:46
Speaker 1: and A advice in the sas e commerce and content businesses.
43:53
Speaker 1: You know, we're talking about Silicon Valley Bank for you know,
43:56
Speaker 1: a better part of a week hearing which is starting
43:58
Speaker 1: to really understand the ripple effects across the tech and
44:02
Speaker 1: VC space. You know it's going to be profound for
44:06
Speaker 1: a lot of these companies, a lot of these VC firms.
44:09
Speaker 1: We want to check in with Josh Chapman. He's a
44:10
Speaker 1: managing partner at Convoy Ventures. Convoy Ventures is an early
44:14
Speaker 1: stage venture fund dedicated to video gaming right John Tucker's alley,
44:19
Speaker 1: the partners with founders at the earliest stages. Josh, give
44:23
Speaker 1: us your perspective on you know, Silicon Valley Bank. What
44:27
Speaker 1: does it mean for the Valley for tech for the
44:31
Speaker 1: VC community. Do we know yet or is it still
44:34
Speaker 1: too early? Absolutely? And thanks for having me back on
44:38
Speaker 1: the show. It's good to be here, Paul and John.
44:40
Speaker 1: These are great questions about the future for the venture
44:43
Speaker 1: capital market. First and foremost is the fear around where
44:49
Speaker 1: the operating cash for portfolio companies seems to be subsiding
44:53
Speaker 1: at least right now, you know, barring future contagion and
44:56
Speaker 1: new information for us all. So that's the first prior
45:00
Speaker 1: for every VC to work on to curing the cash
45:03
Speaker 1: for their portfolio companies, helping them navigate through this. And
45:07
Speaker 1: that's first and foremost. The second ripple effect it's happening
45:10
Speaker 1: right now is that with Silicon Valley Bank down, over
45:13
Speaker 1: fifty percent of venture capital firms have their back office
45:16
Speaker 1: banking operations effectively interrupted or at least frozen, and so
45:22
Speaker 1: that is a really interesting operational thing in the venture
45:25
Speaker 1: market right now, which is going to probably create an
45:28
Speaker 1: artificial operational slowdown for the next at least week, two weeks,
45:32
Speaker 1: four weeks. I mean, however long it would take to
45:35
Speaker 1: move those operations for a banking solution to a different bank,
45:40
Speaker 1: whether it's a Tier one or a group like the
45:42
Speaker 1: First Republic. You know, this is a very live situation.
45:46
Speaker 1: I think that'll be the second ripple effect. I think
45:49
Speaker 1: the third ripple effect here is that venture capitalism market
45:52
Speaker 1: has already been going through a little bit of a
45:54
Speaker 1: cool down, a little bit more of a correction. The
45:57
Speaker 1: words you know, profitability in ibada becoming a little bit
46:00
Speaker 1: more common, and that's healthy for the market as business
46:03
Speaker 1: models get correctly challenged by investors, and I think that's
46:08
Speaker 1: just accelerated by this current environment. I need a short
46:11
Speaker 1: primer on how the whole process works. Tell a dummy
46:14
Speaker 1: how it works. The venture capital firm finds a company
46:18
Speaker 1: it has an interest in and raises the capital, and
46:22
Speaker 1: then that capital you stick it in the bank and
46:25
Speaker 1: withdraw the money as you needed or explained to me
46:29
Speaker 1: absolutely so what we do is venture capital venture capitalist
46:33
Speaker 1: is we raise capital from limited partners or LPs. Those
46:37
Speaker 1: LPs then signed documents. Let's say for one hundred million
46:39
Speaker 1: dollar funds, our third fund is one hundred and fifty
46:43
Speaker 1: and so one hundred million dollar fund. They then sign
46:46
Speaker 1: a document saying that they are committing that capital, but
46:48
Speaker 1: they don't wire that capital immediately. As you find companies
46:52
Speaker 1: that we're excited to invest in, we then called down
46:54
Speaker 1: that capital through a capital call. Very very witty title there,
46:58
Speaker 1: but a capital call where we called down let's say
47:01
Speaker 1: five million of that That money is then used to, say,
47:05
Speaker 1: then a little bit on salaries, operations, rent, travel, and
47:09
Speaker 1: then the rest is going to be used primarily to
47:11
Speaker 1: make those investments and buy equity in what is hopefully
47:14
Speaker 1: the next Uber or Twitter or LinkedIn. Right, and so
47:18
Speaker 1: we call this capital down over time. What that means
47:21
Speaker 1: from a banking operations standpoint is that everyone at sub
47:25
Speaker 1: as well as us over at First Republic is we
47:28
Speaker 1: were calling capital into First Republic, and vcs were calling
47:33
Speaker 1: it into Silicon Valley Bank. With Silicon Valley, with Silicon
47:37
Speaker 1: Valley Bank down, where are you calling that capital too?
47:40
Speaker 1: You have to reposition your operations over to a new
47:43
Speaker 1: bank and set up with KYC and documents and everything
47:47
Speaker 1: to set up a new bank account. The difference is
47:50
Speaker 1: operating companies usually have one bank account they run all
47:53
Speaker 1: cash and all payroll, all expenses. But for us, we
47:57
Speaker 1: have two bank accounts per fund and so we have
48:00
Speaker 1: three funds and so we have over ten bank accounts
48:03
Speaker 1: with First Republic and we're a medium sized firm. Right
48:06
Speaker 1: when you look at Sequoia NA and recent they probably
48:10
Speaker 1: have hundreds of individual bank accounts that they're running. And
48:14
Speaker 1: so that's the complexity of the operational hiccup that's going
48:17
Speaker 1: on right now. Is that complexity that limits you from
48:21
Speaker 1: spreading it out over any number of different banks. We
48:25
Speaker 1: could spread it out, you couldn't head that risk over
48:27
Speaker 1: different banks. Vcs usually centralize it. I haven't met one
48:31
Speaker 1: that has different banks, but they usually centralize most of
48:35
Speaker 1: their banking operations at one location. I think that is
48:38
Speaker 1: sort of maybe a question mark here as we walk
48:41
Speaker 1: into what's next. Yeah, hey, Josh. One of the reasons
48:44
Speaker 1: Silicon Valley Bank came into existence decades ago in the
48:47
Speaker 1: first places because banks don't want to bank some of
48:51
Speaker 1: these small startup companies, you know, no profitability, and where
48:57
Speaker 1: do those companies go now. I think they'll probably stay
49:02
Speaker 1: mostly within the tech banking world. But that said, over
49:05
Speaker 1: the last twenty years, tech has contributed such a meaningful
49:10
Speaker 1: part of GDP growth in not only the world, but
49:13
Speaker 1: of course our country here in the United States, and
49:16
Speaker 1: tech has driven immense investment banking and IPO and M
49:20
Speaker 1: and A revenues for the largest groups like Boldman and
49:23
Speaker 1: JP Morgan, Morgan Stanley. It has been a huge revenue driver.
49:27
Speaker 1: And so because of that, some of these larger banks
49:31
Speaker 1: has started to come downstream to service startups, usually in
49:35
Speaker 1: the series B C or D range right ones that
49:37
Speaker 1: have you know, twenty to one hundred million in cash
49:40
Speaker 1: balances that raised large rounds, but increasingly soone. You're seeing
49:44
Speaker 1: this from groups like Bank of America, JP Morgan and
49:47
Speaker 1: even Boldman now where they're starting to move even earlier.
49:51
Speaker 1: This crisis has accelerated that trend and compressed that that
49:56
Speaker 1: trend into what feels like a week not entirely obviously,
50:01
Speaker 1: there's a lot of work to do, but I think
50:03
Speaker 1: you're going to see a lot of the tier one
50:04
Speaker 1: banks continue to open up venture capital, treasury and banking
50:09
Speaker 1: solutions for this market. What's your typical ratio of hits
50:14
Speaker 1: to missus in terms of the companies in which venture
50:17
Speaker 1: capital firm invests, and how has this banking crisis changed
50:22
Speaker 1: that ratio, if at all. The ratio is usually a
50:28
Speaker 1: high miss to hit ratio. That's kind of sort of
50:30
Speaker 1: the law of large winners. I think it's, you know,
50:34
Speaker 1: less than ten to twenty percent of the portfolio is
50:37
Speaker 1: going to contribute eighty percent plus of your return of
50:39
Speaker 1: capital to investors. And so unlike private equity that you
50:43
Speaker 1: know looks for three to five to ten x return
50:46
Speaker 1: on their investment, venture capital is looking, especially at early stage,
50:50
Speaker 1: at you know, thirty to one hundred x under investment
50:53
Speaker 1: to account for the high risk that you're taking across
50:56
Speaker 1: the board. So, you know, anywhere from fifty to eighty
50:59
Speaker 1: per cent up a portfolio might not work out, depending
51:02
Speaker 1: on the success as a VC firm. Obviously, my job,
51:05
Speaker 1: you know it, John's fall, is to get that ratios
51:08
Speaker 1: as high as I can aid. But it's a it's
51:11
Speaker 1: a high risk game for sure, all right, Josh, it's
51:13
Speaker 1: a high risk game. It's a young man's game. John
51:16
Speaker 1: Josh Chapman, managing partner at Convoy Ventures. Joining us really
51:19
Speaker 1: appreciate getting his perspective on the VC market and any
51:24
Speaker 1: impacts that may come from the failure of Silicon Valley Bank.
51:28
Speaker 1: Thanks for listening to the Bloomberg Markets podcast. You can
51:32
Speaker 1: subscribe and listen to interviews at Apple Podcasts or whatever
51:35
Speaker 1: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
51:39
Speaker 1: at Matt Miller nineteen seventy three and on ball Sweeney,
51:43
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
51:45
Speaker 1: can always catch us worldwide at Bloomberg Radio.